Abolition of the Foreign Investment Promotion Board

The economic liberalization
that began in India in 1991 brought with it a substantial increase in foreign
direct investment (FDI) since then. Those involved in, or following, these
developments, since the 1990s will remember the rather significant role played
by the Foreign Investment Promotion Board (FIPB) in approving FDI into the
country. Foreign investors (or their Indian partners or investee companies) had
to prepare detailed applications setting out reasons for why their proposal for
foreign investment had to be permitted. The FIPB, comprised of members from
various ministries, would (sometimes minutely) scrutinize the details of each
proposal and convey its approval or rejection, as the case may be. Often no
reasons would be forthcoming to support its decision. Lacking any specific
statutory source for its authority, its location was shifted between various
ministries before finally being housed in the Ministry of Finance since 2003.

Over the years, however,
considerable changes in the FDI policy reshaped the role and prominence of the
FIPB. For instance, more sectors were moved from the “approval route” to the
“automatic route” in that FDI could be brought into the relevant industries
without prior approval of the FIPB. Moreover, the FIPB itself began redefining
the manner in which it performed its role. For instance, there was a gradual
enhancement in the level of transparency in its decision-making process. The substance
of its decisions was notified publicly and the relevant bureaucracy even began
to respond to queries from anxious FDI participants and their advisors on an
online chat forum, before the application process itself was transitioned into
an online system. Compared to its initial years, one witnessed a more
transparent process being introduced in the operations of the FIPB, although
the scope of its involvement in FDI was dwindling over time due to more sectors
being brought under the automatic route.

It is in this context that the
Finance Minister’s statement during the budget delivered earlier this month
becomes important. In his speech, he noted:

96. Our Government has already undertaken substantive reforms in FDI
policy in the last two years. More than 90% of the total FDI inflows are now
through the automatic route. The Foreign Investment Promotion Board (FIPB) has
successfully implemented e-filing and online processing of FDI applications. We
have now reached a stage where FIPB can be phased out. We have therefore
decided to abolish the FIPB in 2017-18. A roadmap for the same will be
announced in the next few months. In the meantime, further liberalisation of
FDI policy is under consideration and necessary announcements will be made in
due course.

This has effectively sounded
the death knell for an institution that performed a key role for FDI in India
over the last quarter of a century. It is recognition of the fact that the FIPB
has outlived its utility, and that it is time for some radical change to the
way the country approaches FDI. This move has generally been welcomed, and
rightly so. The decisions of the FIPB tended to be based on subjective criteria
that led to considerable uncertainty to investors as well as to Indian
companies that are recipients of FDI. Unimpeded discretion to this body
obviously gave rise to rent-seeking behaviour that is difficult to bring under check.
The Finance Minister’s proposal would largely address these concerns.

At the same time, it is
premature to come to any definitive conclusion regarding the merits of the
proposal. What is crucial is yet unknown. And that relates to how the FIPB will
be phased out and, more importantly, whether any other mechanism would
effectively replace it. Some are euphoric in that they consider the Finance
Minister’s statement to mean an effective abolition of any system that requires
prior governmental approval for FDI. But, it would be prudent to exercise some
caution, as there is certainly a likelihood that some system of checks and
balances would continue to operate in respect of FDI in the country. It is
possible that in case of sectors that are still within the approval route, the
sectoral regulators will begin exercise oversight over FDI issues. This may
amount to decentralization of sorts, although it might confer greater power to
individual ministries. As this
analysis suggests, FIPB did perform the role of being a single window
clearance mechanism for FDI, and the transition to sectoral regulatory system
may only exacerbate the uncertainties and inefficiencies. Others
have argued that it might be an opportune moment to consider abolishing the
approval route altogether. While this may introduce greater transparency and
certainty, this result is unlikely given the need for regulatory oversight in
FDI in at least a handful of nationally sensitive sectors.[1]
In the end, it seems necessary to await further details regarding what, if at
all, would replace the FIPB.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

OFFHANDThis concerns a major policy decision taken and proposed to be gone ahead with; similar to the one in recent times leading to abolition of the years- old Institution – Planning Commission.

It is quite difficult, rather too early, to foresee or venture to predict the far reaching consequences, of a significant nature /magnitude the move to phase out FIPB could be potent with; essentially,the added concerns the proposed system change of approvals to 'automatic route', over board, might usher in.

Even so, some quick thoughts have been shared on certain related aspects, with a view to inciting/inspiring in-depth deliberations in concerned eminent circles over Linkedin @https://www.linkedin.com/pulse/fmv-vs-x-fv-equally-nebulous-swaminathan-venkataraman

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